IMF Publications - Working Papers/external/pubs/cat/shortres.aspx?TITLE=&auth_ed=&subject=&ser_note=Working+Paper&datecritThe IMF Working Papers series describes research in progress by the author(s) and is published to elicit comments and to further debate. Imf.Org RSS Feed GeneratorENA Global Projection Model for Euro Area Large Economieshttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42760The GPM project is designed to improve the toolkit for studying both own-country and cross-country linkages. This paper creates a special version of GPM that includes the four largest Euro Area (EA) countries. The EA countries are more vulnerable to domestic and external demand shocks because adjustments in the real exchange rate between EA countries occur more gradually through inflation differentials. Spillovers from tight credit conditions in each EA country are limited by direct trade channels and small confidence spillovers, but we also consider scenarios where banks in all EU countries tighten credit conditions simultaneously.02 Mar 2015 09:00:00 ESTWorking Paperhttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42760Remittances and Macroeconomic Volatility in African Countrieshttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42752This paper investigates the channels through which remittances affect macroeconomic volatility in African countries using a dynamic stochastic general equilibrium (DSGE) model augmented with financial frictions. Empirical results indicate that remittances—as a share of GDP—have a significant smoothing impact on output volatility but their impact on consumption volatility is somewhat small. Furthermore, remittances are found to absorb a substantial amount of GDP shocks in these countries. An investigation of the theoretical channels shows that the stabilization impact of remittances essentially hinges on two channels: (i) the size of the negative wealth effect on labor supply induced by remittances and, (ii) the strength of financial frictions and the ability of remittances to alleviate these frictions.02 Mar 2015 09:00:00 ESTWorking Paperhttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42752The Level of Productivity in Traded and Non-Traded Sectors for a Large Panel of Countrieshttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42750This paper explains in detail the construction of series for productivity in the traded and nontraded sectors for a panel of 56 countries spanning 1989–2012. The level of productivity in each sector is defined as real value added per worker in constant 2005 Purchasing Power Parity (PPP) U.S. dollars. To construct these series, we collect industry-level data from several sources, and classify individual industries as traded/non-traded using their ratio of exports to value added. Finally, we aggregate the industry data up to a traded sector and a non-traded sector, accordingly. This new dataset has two main advantages relative to existing datasets: (i) it defines more finely the traded/non-traded sectors, by drawing on much more disaggregated industry source data; and (ii) it allows for meaningful comparisons of the level of productivity across countries/sectors because sectoral productivity is adjusted by its own price level.27 Feb 2015 09:00:00 ESTWorking Paperhttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42750Central and Commercial Bank Balance Sheet Risk Before, During, and After the Global Financial Crisishttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42749This paper presents an overview of exposures in the balance sheets of central banks, banks, and other depository institutions during the past decade, with emphasis on asset growth and currency composition. It exploits the IMF’s SRF-based monetary data to show: (i) there was a widely observed buildup of assets prior to the global financial crisis, but there has been no significant reduction in its wake; (ii) the foreign currency composition of the balance sheets of banks and other depository institutions remained remarkably constant in spite of the crisis, significant changes in the composition of balance sheets, and globalization, and does not seem to have been significantly influenced by the behavior of exchange rates; and (iii) exposure to households increased prior to the crisis, but this increased risk was offset by increased capitalization.27 Feb 2015 09:00:00 ESTWorking Paperhttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42749Interconnectedness, Systemic Crises and Recessionshttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42747This relatively simple model attempts to capture and integrate four widely held views about financial crises. [1] Interconnectedness among financial institutions (banks) can play a major role in precipitating systemic financial crises. [2] Lack of information about the quality of bank portfolios also plays a role in precipitating systemic crises. [3] Financial crises, particularly systemic ones, are often followed by severe, lengthy recessions. [4] Loss of confidence in the financial system is partly responsible for the length and severity of these recessions. In the model, banks make decisions about initiating and liquidating risky loans. Interconnectedness among their asset portfolios can obscure information about these portfolios, causing them to make inefficient decisions about liquidation, and about retention of the managers who assess credit risk. These decisions can increase the depth of recessions, and they can produce systemic financial crises. They can also reduce the effectiveness of future bank risk assessment, increasing the probability of lengthy, severe recessions. The government, acting in the interest of current and future depositors, may wish to increase the transparency of bank portfolios by limiting interconnectedness. The optimal degree of regulation, which may depend on depositors’ degree of risk aversion, may not eliminate financial crises.27 Feb 2015 09:00:00 ESTWorking Paperhttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42747Made in Mexico: Energy Reform and Manufacturing Growthhttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42745This paper assesses the real effects of the energy reform in Mexico by looking at its impact on manufacturing output through changes in energy prices. Using sub-sector and state-level manufacturing output data, along with past variation in energy prices, we find electricity prices––relative to oil and gas––to be more important in the manufacturing process, with a one standard deviation reduction in electricity prices leading to a 2.8 percent increase in manufacturing output. Our estimated elasticities together with plausible reductions in electricity tariffs derived from the energy reform, could increase manufacturing output by up to 3.6 percent, and overall real GDP by 0.6 percent. Larger reductions are possible over the long run if increased efficiency in the sector leads electricity prices to converge to U.S. levels. Moreover, including the impact of lower electricity tariffs on the services sector, could lead to significantly larger effects on GDP. Accounting for endogeneity of unit labor costs in a panel VAR setting leads to an additional indirect channel which amplifies the impact of electricity prices on output.27 Feb 2015 09:00:00 ESTWorking Paperhttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42745Is Banks’ Home Bias Good or Bad for Public Debt Sustainability?http://www.imf.org/external/pubs/cat/longres.aspx?sk=42744Motivated by the recent increase in domestic banks’ holdings of domestic sovereign debt (i.e., home bias) in the European periphery, this paper analyzes implications of banks’ home bias for the sovereign’s debt sustainability. The main findings, based on a sample of advanced (AM) and emerging market (EM) economies, suggest that home bias generally reduces the cost of borrowing for AMs and EMs when debt levels are moderate to high. A worsening of market sentiments appears to dimish the favorable impact of home bias on cost of borrowing particularly for EMs. In addition, for AMs and EMs, higher home bias is associated with higher debt levels, and less responsive fiscal policy. The findings suggest that home bias indeed matters for debt sustainability: Home bias may provide fiscal breathing space, but delays in fiscal consolidation may actually delay problems until debt reaches dangerously high levels.27 Feb 2015 09:00:00 ESTWorking Paperhttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42744Are Foreign Banks a 'Safe Haven'? Evidence from Past Banking Criseshttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42743The presence of foreign banks in emerging markets has increased markedly over the last two decades, raising questions about their potentially stabilizing or destabilizing role during times of financial distress. Most studies on this subject have focused on banks’ asset side (i.e., their lending behavior). This paper focuses on their liability side, studying the behavior of depositors vis-à-vis foreign banks. We rely on data from the banking crises in Argentina and Uruguay over the period 1994-2002 to conduct the study. The paper focuses on three questions; (i) are foreign banks perceived as a safe haven during bank runs?; (ii) does their legal structure (branch versus subsidiary) matter?; (iii) do perceptions depend on the nature of the crisis? Contrary to the commonly held view that foreign banks play a stabilizing role during domestic banking crises, we do not find robust evidence in this regard. Only in one (large) bank run episode, out of five studied, there is evidence of safe haven perceptions towards foreign branches.26 Feb 2015 09:00:00 ESTWorking Paperhttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42743Asia’s Quest for Inclusive Growth Revisitedhttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42742Despite the rapid economic growth and poverty reduction, inequality in Asia worsened during last two decades. We focus on the determinants of growth inclusiveness and suggest options for reform. A cross cross-country empirical analysis suggests that fiscal redistribution, monetary policy aimed at macro stability, and structural reforms to stimulate trade, reduce unemployment and increase productivity are important determinants of inclusive growth. The main policy implication of our analysis is that there is still room to strengthen such policies in Asia to better achieve growth with shared prosperity. In particular, scenario simulations based on our results suggests that the effect of expanding fiscal redistribution on inclusive growth could be sizeable in emerging Asia, since the estimated improvement in our proxy of inclusive growth – a measure of growth in average income “corrected” for the equity impact—ranges from about 1 to about 8 percentage points.26 Feb 2015 09:00:00 ESTWorking Paperhttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42742Are Islamic Banks More Resilient during Financial Panics?http://www.imf.org/external/pubs/cat/longres.aspx?sk=42739Rapid growth of Islamic banking in developing countries is accompanied with claims about its relative resilience to financial crises as compared to conventional banking. However, little empirical evidence is available to support such claims. Using data from Pakistan, where Islamic and conventional banks co-exist, we compare these banks during a financial panic. Our results show that Islamic bank branches are less prone to deposit withdrawals during financial panics, both unconditionally and after controlling for bank characteristics. The Islamic branches of banks that have both Islamic and conventional operations tend to attract (rather than lose) deposits during panics, which suggests a role for religious branding. We also find that Islamic bank branches grant more loans during financial panics and that their lending decisions are less sensitive to changes in deposits. Our findings suggest that greater financial inclusion of faith-based groups may enhance the stability of the banking system.26 Feb 2015 09:00:00 ESTWorking Paperhttp://www.imf.org/external/pubs/cat/longres.aspx?sk=42739